Borrowers are rushing in as mortgage rates dip below 5%

The home mortgage market, propped up by more than $1 trillion in government money, is flashing a strong “buy” sign to house hunters.

Extending a summer-long slide, the average interest rate on new 30-year fixed-rate loans nationwide has broken through the 5% barrier to 4.97%, nearing the lowest level in decades, the Mortgage Bankers Assn. reported this week.

And mortgage finance giant Freddie Mac, which separately tracks rates, reported Thursday that the average fixed rate on a 15-year home loan had dropped to 4.46%, the lowest level on record.

Borrowers are taking notice. Loan applications jumped 13% last week and are up 50% from late June, the bankers group said.


Several factors are fueling the trend, including growing confidence that the economy is recovering, an emerging consensus that housing prices are at or near a bottom, and the federal government’s push to keep mortgage rates low.

“This is a pretty rare planetary alignment,” said Stew Larsen, head of mortgage banking at Bank of the West. “I don’t know if I’d call it a boom just yet, but it’s definitely a boomlet.”

Accelerating this rush to borrow is the suspicion, probably well grounded, that the ultra-low rates may be gone by early next year.

The 5% level is “really the magic threshold,” said Brad Blackwell, a national sales manager at Wells Fargo Home Mortgage, the No. 1 home lender. As recently as early last month, the 30-year average was 5.38%.


Bankers say that most of the borrowers are homeowners trying to save money by refinancing but that a growing number of applications are being filled out by prospective home buyers as well.

Andrea and Brian Morrison know well the pull of a mortgage rate starting with a 4. They had been house-hunting for six months when the 30-year fixed-rate average first dipped into sub-5% territory for a stretch last spring.

“We got a lot more anxious,” said Andrea Morrison. “We were like ‘We’ve got to take advantage of this because it’s not going to get much lower.’ ”

Brian Morrison works at a door and window company, and Andrea has taken time off from her job as a corporate controller to be with their 7-month-old son. In May, they took out a 30-year loan at 4.875% and bought their first home, a three-bedroom house in Corona.


When rates tumbled last spring, just 20% of mortgages made by the Morrisons’ lender, Bank of the West, went to home buyers, with 80% going to homeowners who were refinancing.

In the last two months, however, 37% of the home loans made by the San Francisco bank have gone to buyers, reflecting the combination of more affordable -- but no longer plunging -- home prices, falling interest rates, greater consumer confidence and an $8,000 tax credit for first-time buyers that will expire Nov. 30 if it isn’t extended by Congress.

The ultra-low home-loan rates have been made possible by the Federal Reserve’s extraordinary efforts to prop up the housing market and the overall economy in the wake of the global financial crisis.

Not only is the central bank keeping short-term interest rates near zero, but it also said Wednesday that it would buy a total of $1.25 trillion in mortgage-backed bonds issued by Fannie Mae, Freddie Mac and other government-sponsored agencies under a program begun early this year to push mortgage rates down.


The central bank previously had said it would buy as much as $1.25 trillion, but it hadn’t committed to the full amount.

Most 30-year fixed-rate mortgages currently made by lenders wind up in the pools backing the kind of mortgage bonds the Fed is buying. And the central bank is now buying 80% of these securities as they are created, which means the government is ultimately financing a huge chunk of the country’s newly issued mortgages.

Economists estimate that as a result of the Fed’s bond purchases, loan rates are two-tenths to one-half of a percentage point lower than they would be otherwise, according to Michael Fratantoni, an economist at the Mortgage Bankers Assn.

The 30-year average sank as low as 4.61% in March, according to the mortgage bankers group. Freddie Mac, whose numbers tend to run higher, puts the spring low at 4.78% and says 30-year rates now average 5.04%.


But look out ahead: The Fed also said this week it would stop buying mortgage bonds at the end of March. Although that’s three months later than previously planned, the central bank’s withdrawal from the market is likely to push mortgage rates back up.

And they could go up a lot more than half a point as a recovering economy reawakens dormant concerns about inflation, which tend to boost long-term interest rates in general. In fact, the mortgage bankers group is projecting that 30-year fixed rates will be back at 6% by the end of 2010.

Some mortgage professionals say even more Californians would be applying for loans, especially to buy entry-level homes, if not for an unusual shortage of houses in some markets.

Many borrowers who have lost jobs or are in foreclosure proceedings, instead of trying to sell their homes as they normally would do, are negotiating with lenders to modify their loans and lower their payments, said Fred Arnold, president of the California Assn. of Mortgage Brokers.


Arnold says he sees this situation every day in the San Fernando and Santa Clarita valleys, where his business operates.

The housing shortage especially affects first-time buyers hoping to obtain Federal Housing Administration-insured loans, which allow down payments as low as 3.5% but require painstaking paperwork and additional payments for insurance premiums.

“The FHA buyers are getting outbid by people putting down 20% or 30%,” Arnold said. “Houses are affordable, rates are low, but there’s just not enough inventory.”

The Morrisons had that very experience. The couple, who used FHA financing from Bank of the West to buy their home, were outbid on a couple of other houses before their successful $270,000 offer for the home in Corona’s Wildrose Ranch neighborhood.


The house had sold for $535,000 in 2006, Andrea Morrison said.

Because of the low interest rate, their monthly loan payment is about $1,800 including property tax and insurance, she said. Figuring in the benefits of the tax deduction for interest paid on home mortgages, the Morrisons figure they’re actually paying less than the $1,400 a month it cost to rent their previous home, a two-bedroom condominium in Mission Viejo.

“We got three times the square footage for less than we were paying before in rent. And add in the [$8,000] tax credit, and it’s a lot less,” Andrea Morrison said.

“It was just one of those deals we couldn’t pass up -- especially with the interest rate we got. If we didn’t take it we were crazy.”